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Cashing Out Vacation Time in California: Rights & Options

In California, cashing out vacation time is generally allowed, but it depends on the employer’s policies and the terms of the employment contract. California labor laws mandate that accrued vacation time is considered a form of earned wages, and as such, it must be paid out to employees upon termination of employment, whether voluntarily or involuntarily.
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C.L. Mike Schmidt Published by C.L. Mike Schmidt

PTO Payout California

In California, there’s no legal mandate for employers to offer paid or unpaid vacation time to their employees. However, if a company does provide paid vacation, specific regulations come into play regarding how it should be administered. According to California law, accrued vacation time is viewed as earned wages, accumulating as employees perform their duties.

When it comes to paid time off (PTO), any earned vacation days are considered permanent in California. They don’t expire, and departing employees are entitled to receive payment for any unused vacation time upon leaving the company.

For instance, if an employee earns two weeks (equivalent to 10 work days) of vacation annually, they accrue five days of vacation after six months of work. Vacation pay accumulates over time and cannot be forfeited, even upon termination of employment, regardless of the circumstances.

Unless otherwise stipulated by a collective bargaining agreement, upon termination of employment, all earned and unused vacation must be paid to the employee at their final rate of pay. The California legislature, in order to ensure that vacation plans were fairly and equitably handled, provided that the Labor Commissioner was to “apply the principles of equity and fairness” in resolving vacation claims.

How Can I Cash Out My Vacation Time in California?

According to SCLG, when it comes to your vacation time, you have the option to cash it out while you’re still employed or when you decide to leave your job [1]. This process, often referred to as a “PTO cash out,” allows you to receive payment for any unused vacation days, as vacation time is considered a form of wage under California state law. Whether you resign, get terminated, or quit, you’re entitled to this payout, which must be included in your final paycheck.

There are two main scenarios in which you can cash out your vacation time: upon termination or resignation, or while you’re still employed with the company. Regardless of the circumstances, your payout for any unused paid time off (PTO), including vacation time, must be calculated at your final rate of pay.

Since California treats vacation time as a form of wage, employers are legally obligated to compensate you for any owed wages upon your departure, regardless of the reason. This payout should be made immediately in your final paycheck, covering your last pay period up to the time of termination.

In cases where final wages are not paid promptly, the employer may be subject to a waiting time penalty, which could amount to your daily pay for each day that the final wages are late, up to 30 days.

However, if you’re covered by a collective bargaining agreement, the terms of the agreement dictate how unused PTO is paid out. Alternatively, you and your employer may have arrangements in place to cash out accrued vacation time while you’re still employed, typically outlined in your employment contract or company policies.

Regardless, you are entitled to payment for your accrued vacation time. They are a form of wage that you have earned. Employers are forbidden from taking vacation time back. They also cannot take away vacation time as a punishment for other workplace misconduct. Vacation time in California also does not “expire.” This means that “use it or lose it” vacation policies are forbidden in the state.

If your employer violates any of these regulations regarding vacation time payout or usage, you have the right to take legal action under California’s wage and hour laws to recover any unpaid wages.

How to Calculate PTO Payout

According to PTO Genius, the timing of PTO payout is contingent on state laws and company policies [2]. Certain states mandate that employers pay out unused PTO upon an employee’s departure, while others prohibit “use-it-or-lose-it” policies for vacation or sick leave. Generally, employees can cash out unused PTO when they quit, are terminated, retire, or at the end of the year.

While most employees receive their PTO payout upon leaving the company, some employers allow cashing out unused PTO annually. Additionally, companies with PTO conversion programs enable employees to convert their accrued PTO into cash or other benefits throughout the year, offering flexibility and control over their paid time off.

Regarding taxation, earned PTO is considered wages in most states, subject to the supplemental income tax rate of 22% by the IRS. Employers should ensure their payroll systems deduct the appropriate taxes for PTO payouts, similar to regular paychecks and bonuses.

To calculate PTO payout for hourly employees, multiply their hourly pay rate by the number of unused PTO hours and subtract 22% for taxes. For salaried employees, determine their equivalent hourly rate by dividing their salary by the standard working hours per year, then follow the same calculation process.

For instance, let’s consider an hourly employee earning $15 per hour with 30 unused PTO hours:

  • Hourly pay rate x Number of unused PTO hours = Pre-tax PTO payout
  • $15 x 30 = $450 (pre-tax)
  • $450 x 0.78 = $351 (final PTO payout)

Similarly, for a salaried employee with a salary of $60,000 and 30 unused PTO hours:

  • Equivalent hourly rate x Number of unused PTO hours = Pre-tax PTO payout
  • ($60,000 ÷ 2,080) x 30 = $865.38 (pre-tax)
  • $865.38 x 0.78 = $675 (final PTO payout)

Understanding PTO payout and its calculations ensures fair compensation for employees and compliance with relevant tax regulations.

Does California have a “Use it or Lose it” Vacation Policy?

According to Nolo, in contrast to certain states, California prohibits the implementation of “use-it-or-lose-it” vacation policies [3]. Such policies mandate that accrued vacation time must be utilized by a specified deadline, typically by the year’s end, or else it is forfeited. Because accrued vacation is regarded as earned wages, “use-it-or-lose-it” policies are deemed unlawful as they entail withholding owed wages from employees.

However, employers in California have the discretion to establish a cap on vacation accrual. This means that once employees reach a predetermined number of days, their vacation accrual halts until they utilize some of their accrued time off. This approach enables employers to exercise some control over vacation accrual and prevent employees from accumulating excessive amounts of vacation time.

While there’s no set number for a permissible cap, the California Department of Labor Standards Enforcement (DLSE) – the agency that enforces California wage and hour laws – has provided some guidance. In the past, the DLSE has held that a vacation cap could be no less than 1.75 times the annual accrual rate.

However, the DLSE has since withdrawn that bright line rule and instead states only that the cap must be “reasonable.” While a 1.75 cap is probably still the safest ratio, a 1.5 cap may also be within legal limits. The example below shows how the vacation cap works.

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